HSA
Health Savings Account
Summary
The HSA is a highly effective account for growing wealth when managed tactfully. This is because it boasts several tax advantages.
Contributing money to the HSA reduces your tax bill for the year you contribute to it, just like a traditional IRA does. This makes it a tax-deferred account. This means that maxing out your contribution limit also maximizes your potential tax refund.
The HSA also works as a tax-exempt vehicle. This is similar to a Roth IRA. When you distribute (spend) HSA funds, the government won’t tax you. But you must ensure the funds are spent on qualified medical expenses.
Another tax benefit of the HSA is tax-free investment growth. If you want to maximize this tax advantage, consider allocating your riskiest investments within your HSA, like equities and certain alternative assets. Doing this allows you to avoid paying taxes on some of your largest investment gains within your overall portfolio. The effectiveness of this strategy depends on several factors, so it’s best to consult a financial advisor.
So, the HSA combines the tax benefits of both the Traditional IRA and Roth IRA. You can also withdraw from your account at any time. Which means you don’t have to wait until full retirement age (59.5) to utilize the funds, like many retirement accounts require.
One minor drawback to the HSA account is that it has a relatively low annual contribution limit ($4,150 per insured individual in 2024). And this makes sense, given its strong tax avoidance attributes.
If you want to know how to open an HSA, first confirm that you’re eligible. You must be covered by a high-deductible health plan (HDHP) and meet other IRS eligibility requirements. See the IRS tax code above. After that, you can search for an online HSA custodian or contact us below, and we’ll set one up for you.
As for how much to contribute to a newly established HSA, start by adding up the total amount you spent on qualified medical expenses last year. Use this number as a baseline for your annual contribution to the HSA. By contributing this amount to your HSA and then swiping your HSA debit card on your next qualified medical expense purchase, you’ll immediately start to reduce your tax due in that year. The best part is that the list of items that fall under qualified medical expenses for HSAs is vast. It’s not very hard to rack up the tax savings, and you’ll be spending the money on medical expenses that you would anyway. The difference, though, is that you’re using the HSA and its linked debit card as a pass-through account to reduce your taxes each year.
Best for low-income, middle-income, and high-income families, individuals with high medical expenses, and tax-sensitive individuals.
Ease of Setup
HSAs are easy to establish online in under 1 hour. However, not all individuals are eligible to set up an account. You must be covered by a high-deductible health plan and meet other requirements. Reference the IRS tax code above.
Contribution Limits
For 2024, if you have self-only HDHP coverage, you can contribute up to $4,150 annually. If you have family HDHP coverage, you can contribute up to $8,300 annually. This is a lower contribution limit when compared to retirement accounts, but it is a sizeable amount for low and middle-income households.
Tax Advantages
Tax-deferred contributions lower your annual tax liability, your investments grow tax-free, and making withdrawals on qualified medical expenses is tax-free. This is often referred to as a triple tax advantage account.
Withdrawal Access
You can withdraw from your HSA anytime without penalty, so long as the proceeds are spent on qualified medical expenses. HSAs even have a debit card that you can use to swipe for purchases. Withdrawals made for non-qualified medical expenses are subject to taxes and penalties. Reference the IRS tax code above.